A Long-Delayed Crash Finally Arrives

My father-in-law was not an insider, a millionaire or an industry big shot, yet at one time he was the owner of a pair of New York City taxi medallions.

There was a time when that was possible. The fact that it hasn’t been, for decades, illuminates what is broken about the way the city handles its taxi licenses.

My wife’s father drove cabs, including an iconic Checker, and eventually saved enough money to purchase two medallions in the 1960s for around $20,000. For those who don’t live in New York or cities with similar restrictions, the medallion system has served to limit the number of licensed cabs on the streets since then-Mayor Fiorello La Guardia instituted it in 1937. Drivers could only operate yellow cabs and accept street hails if they held a medallion or if, often in the ‘60s and nearly always today, they worked for someone who did.

By the late ‘80s or early ‘90s, the value of taxi medallions, including the two my father-in-law owned, had appreciated substantially. Medallions those days sold for about a quarter of a million dollars. Around that time, I grew very concerned on his behalf.

The market for medallions was clearly artificial because the scarcity driving it was a government-created state of affairs, and that scarcity could be destroyed overnight by other government decisions. Further, the market was, and is, highly manipulated. You didn’t sell a medallion on eBay in those days - for one thing, eBay didn’t exist back then. Even now, you have to involve the city’s Medallion Transfer Unit if you wish to sell.

While it was not required, most sellers chose to go through brokers: a small web of highly connected insiders who rationed the supply of medallions on the market at any given time. By exerting this control, they avoided driving down prices through competition. And because medallions’ prices had already exceeded the ability of any prospective driver to pay cash for them, another network sprang up - financial institutions, often credit unions, willing to finance medallion deals. These institutions, in turn, worked closely with the brokers whose actions helped to protect the value of their collateral.

My fear 25 years ago was that, at any given time, New York City might greatly increase the supply of cabs, thus driving down a medallion’s price, or that federal court or antitrust action might upend the entire system on which medallions’ value depended.

The latter never happened. Supply, however, did increase. The number of yellow taxis permitted on city streets went up slightly later in the ‘90s, when it was boosted to 11,920. It has gone up again since, to 13,437 medallions today.

The supply of licensed cars rose again more recently, and more significantly, in 2013, with the advent of boro taxis. The apple-green vehicles are allowed to serve the four outer boroughs, with the exception of airports, and Manhattan above 96th Street - areas where, for the most part, it was rare to catch a yellow cab. At first, green cabs didn’t significantly threaten yellow taxis, because of the difference in their areas of operation; instead, they cannibalized the business of the unlicensed “gypsy” cabs that were previously a fixture outside Manhattan. While boro taxis may have had some impact on the longstanding medallion system, that impact was probably small, at least initially.

Today, new developments are finally exerting enough pressure to crack New York’s existing taxi system. Uber is the biggest of these changes. The New York Post reported in March that Uber’s fleet now officially outnumbers the city’s medallion cabs, and its competitive rates have lured drivers as well as customers away from the traditional model. Competitors such as Lyft and newcomer Gett have also jockeyed for a cut of the taxi market. Yellow cabs still make many more trips than Uber cars, but they no longer have the monopoly they once did, especially in central Manhattan. A medallion is really just a license to accept street hails, and street hails are not as important now that cars can be summoned on a smartphone.

Not to be overlooked, too, is the significant migration of population and commerce away from Manhattan toward outer boroughs like Brooklyn and Queens, where green boro cabs can freely compete.

The result is, predictably, that the value of medallions has declined. The New York Times reported that the average value for individual medallions has fallen 23 percent from the 2013 peak; corporate fleet medallions are down 28 percent. For a market under normal conditions, this change would be the unsurprising result of successful new competition and changing customer demographics. But for the insiders who have built their businesses on the foundation of New York’s antiquated government controls, the change is a systemic shock.

One of the largest taxi fleet owners, Evgeny “Gene” Freidman, recently said in an interview that the city should guarantee taxi medallion loans as financial institutions tighten credit. He argued that the taxi industry is too big to fail. Freidman is currently involved in litigation with Citibank, which is attempting to seize 87 of his medallions. Despite his arguments, however, foreclosing on medallions need not actually lead to a taxi shortage on the streets of New York City. In fact, it almost certainly will not. No matter who holds the medallions, they will be leased to drivers who want to make a living behind the wheel of a yellow cab, while other drivers will still hack for boro taxis, Uber and other competitors.

The entire medallion system is a travesty that never should have existed in the first place. There is no reason why a government-issued license to conduct business should become private property that is freely transferable on private markets. If you want to become a CPA, you can’t get there by buying my license. And the government has no business restricting the number of CPAs who can practice in order to protect my investment.

The system has worked to enrich insiders at the expense of the very people it was originally supposed to protect: the cab drivers who spend long hours behind the wheel. Today’s drivers don’t have the opportunity my father-in-law had to save their money and purchase their own medallions at a price that makes economic sense considering what they earn driving the car.

Recent prices were rational only on the theory that medallions could only appreciate in value. Now that theory has been soundly disproven. The city and its taxi industry face the prospect of trying to undo this historical mistake with as little damage as possible to the financial institutions and other participants who bought into the idea that the old ways of doing taxi business would never change. That idea was as misguided in La Guardia’s time as it is in ours.

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